- -----------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
-------
For the fiscal year ended December 31, 1997
Commission file number 1-11533
PARKWAY PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 74-2123597
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Jackson Place Suite 1000
188 East Capitol Street
Jackson, Mississippi 39201-2195
(Address of principal executive offices) (Zip Code)
(601) 948-4091
Registrant's telephone number:
Securities registered under Section 12(b) of the Act:
Common Stock, $.001 Par Value
New York Stock Exchange
Securities registered under Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent files
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 25, 1998 was
$319,670,000.
The number of shares outstanding in the registrant's class
of common stock as of March 25, 1998 was 11,085,323.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1998 Annual Meeting
of Shareholders are incorporated by reference into Part III.
- -----------------------------------------------------------------
PART I
Item 1. Business.
General
Parkway Properties, Inc. ("Parkway" or the "Company") is a
self-administered, self-managed real estate investment trust
("REIT") specializing in the acquisition, ownership, management,
financing and leasing of office properties in the Southeastern
United States and Texas. Parkway and its predecessors have been
public companies engaged in the real estate business since 1971,
and have successfully operated and grown through several major
real estate cycles. At March 25, 1998, Parkway owned or had an
interest in 46 office properties located in twelve states with an
aggregate of approximately 6.3 million square feet of leasable
space.
The purchase of the Mtel Centre in Jackson, Mississippi in
July 1995 marked the implementation of the Company's business
strategy of focused investment in office properties. As part of
this strategy, the Company has (i) completed the acquisition of
42 office properties, encompassing approximately 5.9 million net
rentable square feet, for a total investment of more than $517.3
million; and (ii) sold or is in the process of selling all of its
non-office assets. Total investment is defined as purchase price
plus estimated closing costs and anticipated capital expenditures
during the first 12 to 24 months of ownership for tenant
improvements, commissions, upgrades and capital improvements to
bring the building up to the Company's standards.
In addition to direct real estate acquisitions, Parkway's
investment strategy has also historically included the
consummation of business combination transactions with other
public real estate and financial companies which Parkway deemed
to be undervalued. Since 1979, Parkway has completed eight such
business combinations. Management may pursue similar business
combination transactions on a selected basis in order to enhance
stockholder value.
Since January 1997, the capital structure of Parkway has
changed substantially.
Effective January 1, 1997, the Company elected to be
taxed as a real estate investment trust under the
Internal Revenue Code of 1986 ("Code"), as amended.
On January 22, 1997, the Company completed the sale of
1,750,000 shares of common stock in a public offering.
Effective February 19, 1997, the Underwriters in this
offering exercised the over-allotment option and
purchased an additional 262,500 shares. Net proceeds to
the Company of these sales were approximately
$51,221,000.
On September 24, 1997, the Company completed the sale
of 3,000,000 shares of common stock in a public
offering. Effective October 6, 1997, the Underwriters
in this offering exercised the over-allotment option
and purchased an additional 450,000 shares. Net
proceeds to the Company of these sales were
approximately $109,440,000.
On February 23, 1998, the Company completed the sale of
451,128 shares of common stock to a unit investment
trust with net proceeds to the Company of $14,231,000.
On March 11, 1998, the Company completed the sale of
common stock through the direct placement of 855,900
shares of common stock to institutional investors with
net proceeds to the Company of $26,948,000.
The Company completed its reorganization into the
UPREIT (Umbrella Partnership REIT) structure effective
January 1, 1998. The Company anticipates that the
UPREIT structure will enable it to pursue additional
investment opportunities by having the ability to offer
tax-advantaged operating partnership units to property
owners in exchange for properties.
Parkway has managed its properties in Jackson since 1990 and
expanded its self-management, effective January 1, 1998, to
office properties that it owns in Houston, Atlanta, Dallas,
Charlotte, Winston-Salem, Columbia, Knoxville and Memphis. As
such, Parkway self-manages in excess of 80% of its current
portfolio on a net rentable square footage basis. The Company
benefits from a fully integrated management infrastructure,
provided by its wholly-owned management subsidiary, Parkway
Realty Services LLC ("Parkway Realty"). In addition to its owned
properties, Parkway Realty currently manages and/or leases
approximately one million net rentable square feet for third
parties. The Company is in the process of significantly
expanding its management efforts through plans to expand the self-
management of its properties to all markets as its presence in
those markets reaches the minimum net rentable square footage
necessary to make it cost efficient to self-manage. The Company
believes self-management will result in higher tenant retention
and will allow the Company to enhance stockholder value through
the application of its hands-on management style.
Until December 31, 1996, Parkway operated as a real estate
operating company. For the taxable years 1996 and 1995, Parkway
paid virtually no federal income taxes ($64,000 in 1995 and none
in 1996) primarily because Parkway had certain net operating
losses ("NOLs") to shelter most of Parkway's income from such
taxes. However, the increase in the number of outstanding common
shares, which resulted from the completion of a private placement
of common shares in June 1996 and Parkway's mergers during 1994
and 1995, caused the use of Parkway's NOLs to be significantly
limited in any one year. Accordingly, Parkway's board of
directors determined that it was in the best interests of Parkway
and its stockholders to elect to qualify Parkway as a REIT under
the Code for the taxable year beginning January 1, 1997, which
allows Parkway to be generally exempt from federal income taxes
even if its NOLs are limited or exhausted, provided it meets
various REIT requirements.
Business Objectives and Strategy of the Company
Parkway's business objective is to maximize total return to
stockholders over time primarily through increases in
distributions and share price appreciation. During 1997, Parkway
distributed $1.20 per share in dividends to shareholders which
represents a 93.5% increase over the 1996 dividends distributed
of $.62 per share. Distributions in 1997 of $1.20 per share
represent a payout of 48.4% of the Company's funds from
operations ("FFO") for the year. The Company anticipates that
its dividend payout ratio will continue to approximate 50% of its
FFO, subject to compliance with the REIT distribution
requirements. See Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operation" for discussion
of FFO.
Parkway generally seeks to acquire well-located Class A, A-
or B+ (as classified within their respective markets) multi-story
office buildings which are located in primary or secondary
markets in the Southeastern United States and Texas, ranging in
size from 50,000 to 500,000 net rentable square feet and which
have current and projected occupancy levels in excess of 70% and
adequate parking to accommodate full occupancy. The Company
targets buildings which are occupied by a major tenant (or
tenants) (e.g., a tenant that accounts for at least 30% of the
building's total rental revenue and has at least five years
remaining on its lease). Parkway strives to purchase office
buildings at initial unleveraged yields on its total investment
in the range of 9% to 11% per annum. The Company defines initial
unleveraged yield as net operating income divided by total
investment (as previously defined), where net operating income
represents budgeted cash operating income for the current year at
current occupancy rates and at rental rates currently in place
with no adjustments for anticipated expense savings, increases in
rental rates, additional leasing or straight line rent. Leases
that expire during the year are assumed to renew at market rates
unless interviews with tenants during pre-purchase due diligence
indicate a likelihood that a tenant will not renew. In markets
where the Company self-manages its properties, NOI also includes
the net management fee expected to be earned during the year.
The Company also generally seeks to acquire properties whose
total investment per net rentable square foot is at least 25%
below estimated replacement cost and whose current rental rates
are at or below market rental rates. While the Company seeks to
acquire properties which meet all of the acquisition criteria,
specific property acquisitions are evaluated individually and may
fail to meet one or more of the acquisition criteria at the date
of purchase. Since January 1, 1997, the Company has acquired 30
office properties aggregating approximately 4.3 million net
rentable square feet for a total investment of approximately
$412.6 million, or approximately $96 per net rentable square
foot.
Parkway believes that its focus on its existing and targeted
high growth markets in the Southeastern United States and Texas
should provide further opportunities to enhance stockholder
value. Parkway is presently focusing its resources on
acquisitions in both its existing markets and several additional
markets in the Southeastern United States, including central
business districts and suburban markets. Parkway has targeted
these markets based on positive economic indicators such as
higher than average job growth and strong real estate market
fundamentals such as increasing occupancy levels, strong net
absorption and rising rental rates.
Parkway's management team consists of experienced office
property specialists with proven capabilities in office property
(i) acquisition; (ii) ownership; (iii) management; (iv) leasing;
(v) financing; and (vi) re-positioning. The Company believes
these capabilities will allow Parkway to continue to create
office property value in all phases of the real estate cycle.
Parkway's nine senior officers have an average of over 16 years
of real estate industry experience, and have worked together at
Parkway or its predecessors for an average of over ten years.
Management has developed a highly service-oriented management
culture and believes that its proactive leasing, property
management and asset management activities will result in higher
tenant retention and rental rates and will continue to translate
into enhanced stockholder value.
Dispositions
Since January 1, 1995, Parkway has also pursued a strategy
of liquidating its non-office assets and office building
investments outside its area of geographic focus, and using the
proceeds from such sales to acquire office properties in the
Southeastern United States and Texas. In accordance with this
strategy, since January 1, 1995, Parkway has sold assets with a
book value of approximately $41 million for approximately $62
million, resulting in an aggregate gain for financial reporting
purposes of approximately $21 million. The book value of all
remaining non-office building real estate assets and mortgage
loans, all of which are for sale, was approximately $5.4 million
as of December 31, 1997.
Administration
The Company is self administered and self managed and
maintains its principal executive offices in Jackson,
Mississippi. As of March 25, 1998, the Company had 120
employees.
The operations of the Company are conducted from
approximately 8,000 square feet of office space located at 188
East Capitol Street, One Jackson Place Suite 1000, Jackson,
Mississippi. The building is owned by Parkway and is leased by
Parkway at market rental rates. The Company maintains a website
at www.parkwayco.com.
Item 2. Properties.
General
The Company invests principally in office buildings in the
Southeastern United States and Texas, but is not limited to any
specific geographical region or property type. Including office
building acquisitions made through March 25, 1998, the Company
has 46 office buildings comprising approximately 6.3 million
square feet of office space located in twelve states.
Property acquisitions in 1997, 1996 and 1995 were funded
through a variety of sources, including:
Cash reserves and cash generated from operating
activities,
Sales of non-core assets, including real estate, mortgage
loans and securities,
Fixed rate, non-recourse mortgage financing at fully-
amortizing terms ranging from 12 to 15 years,
Assumption of existing fixed rate, non-recourse mortgages
on properties purchased,
Sales of Parkway common stock, and
Advances on bank lines of credit.
Office Buildings
The Company intends to hold its portfolio of office
buildings for investment purposes. The Company does not propose
any program for the renovation, improvement or development of any
of the office buildings, except as called for under the renewal
of existing leases or the signing of new leases or improvements
necessary to upgrade recent acquisitions to the Company's
operating standards. All such improvements are expected to be
financed by cash flow from the portfolio of office properties and
advances on bank lines of credit.
In the opinion of management, all properties are adequately
covered by insurance.
All office building investments compete for tenants with
similar properties located within the same market primarily on
the basis of location, rent charged, services provided and the
design and condition of the improvements. The Company also
competes with other REITs, financial institutions, pension funds,
partnerships, individual investors and others when attempting to
acquire office properties.
The following table sets forth certain information about office properties
owned by the Company as of March 25, 1998 (in thousands, except square foot
data):
<TABLE>
<CAPTION>
Estimated
Average Average
% of Total Rent Market Percentage Percentage
Total Net Net Per Rent Per of Leases Leased
Number of Rentable Rentable Square Square Expiring as of
Location Properties Square Feet Square Feet Foot(1) Foot(2) in 1998(3) 02/28/98
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Houston, TX 11 1,624,000 25.9% 14.16 16.39 10.9% 98.6%
Jackson, MS 3 573,000 9.2% 17.29 18.16 6.6% 99.7%
Atlanta, GA 6 554,000 8.8% 16.11 18.15 11.4% 98.9%
Dallas, TX 4 534,000 8.5% 13.99 17.97 8.1% 94.0%
Knoxville, TN 2 514,000 8.2% 13.85 15.06 16.3% 89.4%
Memphis, TN 2 512,000 8.2% 16.87 17.41 6.8% 92.2%
Columbia, SC 1 297,000 4.7% 12.52 14.50 3.7% 97.4%
Chesapeake, VA 2 256,000 4.1% 14.58 16.08 19.9% 96.8%
Winston-Salem, NC 1 239,000 3.8% 18.67 19.00 3.1% 99.3%
Ft. Lauderdale, FL 2 215,000 3.4% 14.71 18.01 9.9% 95.3%
All Others 12 953,000 15.2% 15.00 16.55 9.7% 95.5%
-- --------- ------ ----- ----- ----- -----
46 6,271,000 100.0% 15.07 16.90 9.9% 96.4%
== ========= ====== ===== ===== ===== =====
</TABLE>
(1)Average rent per square foot is defined as the weighted average current gross
rental rate including escalations for occupied office space in the building as
of February 28, 1998.
(2)Estimated average market rent per square foot is based upon information
obtained from (i) the Company's own experience in leasing space at the
properties; (ii) leasing agents in the relevant markets with respect to quoted
rental rates and completed leasing transactions for comparable properties in the
relevant markets; and (iii) publicly available data with respect thereto.
Estimated average market rent is weighted by the net rentable square feet
expiring in each property.
(3)The percentage of leases expiring in 1998 represents the ratio of square feet
under leases expiring in 1998 divided by total net rentable square feet.
The following table sets forth scheduled lease expirations for properties owned
as of March 25, 1998 for leases executed as of February 28, 1998, assuming no
tenant exercises renewal options:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Expiring Estimated
Gross Average
Net Rental Market Rent
Rentable Percent Annualized Rate Per Per Net
Year of Number Square of Total Rental Net Rentable Rentable
Lease of Feet Net Rentable Amount Square Square
Expiration Leases Expiring Square Feet Expiring(1) Foot(2) Foot(3)
----------- ------- --------- ------------ ----------- ------------ -----------
<C> <C> <C> <C> <C> <C> <C>
1998 197 623,000 9.9% 8,642,000 13.88 16.50
1999 185 999,000 15.9% 14,065,000 14.07 16.21
2000 175 832,000 13.3% 12,947,000 15.56 17.52
2001 109 818,000 13.1% 12,047,000 14.72 16.94
2002 89 793,000 12.7% 11,926,000 15.03 16.80
</TABLE>
(1)Annualized rental amount expiring is defined as net rentable square feet
expiring multiplied by the weighted average expiring annual rental rate per net
rentable square foot.
(2)Weighted average expiring gross rental rate is the weighted average rental
rate including escalations for office space.
(3)Estimated average market rent is based upon information obtained from (i)
the Company's own experience in leasing space at the properties: (ii) leasing
agents in the relevant markets with respect to quoted rental rates and
completed leasing transactions for comparable properties in the relevant
markets; and (iii) publicly available data with respect thereto. Estimated
average market rent is weighted by the net rentable square feet expiring in
each property.
Tenants
The office properties are leased to approximately 837 tenants, which engage
in a wide variety of industries including banking, professional services
(including legal, accounting, and consulting), energy, financial services and
telecommunications. The following table sets forth information concerning the
10 largest tenants of the properties owned as of March 25, 1998 (in thousands,
except square foot data):
<TABLE>
<CAPTION>
Annualized Lease
Square Rental Expiration
Tenant Feet Revenue(2) Office Building Date
- ---------------------------- --------- ---------- --------------------- ---------
<S> <C> <C> <C> <C>
Mtel 184,559 $2,817 (1) (1)
Morgan Keegan 159,910 3,048 Morgan Keegan Tower 09/07
GECO-PRAKLA (Schlumberger) 152,917 2,202 Schlumberger Building 01/02
Raytheon Engineers
and Constructors, Inc. 147,075 2,024 Raytheon Building 12/05
Burlington Resources 107,646 1,440 400 North Belt (3)
First Tennessee Bank 100,845 1,426 First Tennessee Plaza 09/04
DHL Airways 98,649 1,540 One Commerce Green 10/04
American Medical Electronics 96,166 1,156 Courtyard at Arapaho 12/01
NationsBank 93,786 1,121 NationsBank Tower 06/06
Premier Health Systems, Inc. 92,523 1,447 Charlotte Park 11/99
--------- -------
1,234,076 $18,221
========= =======
</TABLE>
(1) Mobile Telecommunications Technologies Corporation (Mtel), a service
provider in the telecommunications industry, occupies 154,640 net rentable
square feet in Mtel Centre' which represents 59.2% of the total net
rentable square feet of the building. This lease is non-cancelable,
expires in July 2005 and includes a contractual rental increase in the 61st
month of the lease term based on the corresponding increase in the Consumer
Price Index since the inception of the lease. In addition, Mtel occupies
29,919 net rentable square feet in One Jackson Place, which represents
13.7% of the total net rentable square feet of the building, under a lease
that expires in June 2002.
(2) Annualized Rental Revenue represents the gross rental rate (including
escalations) per square foot as of February 28, 1998, multiplied by the
number of square feet leased by the tenant.
(3) Net rentable square feet under multiple leases that expire as follows:
12/06 86,096
09/04 8,180
09/02 7,172
03/02 3,866
08/00 2,332
-------
107,646
=======
Non-Core Assets
Since January 1, 1995, Parkway has pursued a strategy of
liquidating its non-core assets and using the proceeds from such
sales to acquire office properties. The Company defines non-core
assets as all assets other than office properties which at
December 31, 1997 consisted of land, mortgage loans and other
real estate properties. In accordance with this strategy,
Parkway sold non-core assets with a book value of approximately
$23,135,000 for cash proceeds of approximately $37,147,000 during
1997 and 1996. Aggregate gains for financial reporting purposes
from sales, write-downs and deferred gains recognized on non-core
assets during 1997 and 1996 were $13,365,000. The book value of
all remaining non-office building real estate assets and mortgag
loans, all of which are for sale, was approximately $5,426,000 as
of December 31, 1997. Of this amount, $4,309,000 represents
undeveloped land with a carrying cost of approximately $50,000
annually.
Item 3. Legal Proceedings.
The Company and its subsidiaries are, from time to time,
parties to litigation arising from the ordinary course of their
business. Management of Parkway does not believe that any such
litigation will materially effect the financial position or
operations of Parkway.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
Effective August 22, 1996, the Company's common stock ($.001
par value) was listed and began trading on the New York Stock
Exchange under the symbol "PKY". Prior to that date, the stock
was traded in the over-the-counter market and was listed on the
NASDAQ National Market System under the symbol "PKWY". The
number of record holders of the Company's common stock at March
25, 1998, was 3,296.
The following table sets forth, for the periods indicated,
the high and low last reported sales prices per share of the
Company's common stock and the per share cash distributions paid
by Parkway during each quarter.
Year Ended *Year Ended
December 31, 1997 December 31, 1996
------------------------ ------------------------
Distri- Distri-
Qtr. Ended High Low butions High Low butions
- ---------- -------- ------- ------- -------- ------- -------
March 31 $28.625 $23.875 $ .25 $16.672 $12.828 $.113
June 30 26.875 21.625 .25 17.00 14.75 .12
Sept. 30 34.188 26.375 .35 20.875 15.50 .14
Dec. 31 34.938 31.75 .35 26.00 20.375 .25
----- -----
$1.20 $.623
===== =====
*On April 30, 1996, the Company completed a 3 for 2 common
stock split, effected in the form of a stock dividend of one
share for every two shares outstanding. All per share
information prior to the stock split has been restated to reflect
the stock split.
All distributions during 1997 and 1996 ($1.20 and $.623 per
share, respectively) were taxable as ordinary income for federal
income tax purposes.
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Twelve Twelve Twelve Six Twelve Twelve
Months Months Months Months Months Months
12/31/97 12/31/96 12/31/95 12/31/94 06/30/94 06/30/93
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues
Rental income from
office properties $45,799 $18,840 $6,918 $2,483 $4,768 $4,361
Other income 2,288 5,239 5,849 2,423 3,442 1,862
Expenses
Operating expenses:
Office properties 19,697 8,466 2,960 972 2,087 1,991
Non-core assets 462 1,379 1,916 979 1,673 1,695
Interest expense 5,581 3,526 2,230 1,078 2,392 2,487
Depreciation &
amortization 6,033 2,444 1,331 565 1,022 981
Minority interest 59 (28) (100) (209) (542) (598)
Interest expense 997 621 291 140 - - General &
admini-
strative & other 3,674 3,758 3,185 932 1,072 941
Income (loss) before
gains &
discontinued
operations 11,584 3,913 954 449 506 (1,274)
Gain on sales
Gain on real estate
mortgage loans,
securities and real
estate partnership 2,907 10,458 10,866 556 746 2,496
Gain on sale of
discontinued
operations - - - - - 1,030
Income before
discontinued
operations 14,491 14,371 11,820 1,005 1,252 2,252
Discontinued operations - - - - 51 460
Net income $14,491 $14,371 $11,820 $1,005 $1,303 $2,712
PER SHARE DATA:
Net income:
Basic $2.05 $3.92 $4.24 $.43 $.67 $1.43
Diluted $2.01 $3.81 $4.16 $.42 $.65 $1.40
Book value (at end
of period) $25.06 $18.30 $24.51 $13.75 $13.71 $7.77
Cash distributions:
Declared $1.20 $.62 $.44 $.11 $.40 $.53
Paid $1.20 $.62 $.44 $.21 $.43 $.53
Weighted average
shares outstanding:
Basic 7,078 3,662 2,787 2,316 1,950 1,890
Diluted 7,214 3,776 2,844 2,372 2,003 1,944
BALANCE SHEET DATA:
Office investments
net of deprecia-
tion $349,652 $122,802 $52,284 $24,801 $24,218 $23,817
Total assets 368,592 147,035 88,043 61,062 59,735 55,850
Mortgage notes
payable 105,220 62,828 34,704 22,827 22,902 23,769
Notes payable
to banks 6,473 - - 4,154 3,631 940
Total liabilities 123,851 69,127 38,832 28,824 28,006 28,667
Stockholders'
equity 244,741 77,908 49,211 32,238 31,729 27,183
</TABLE>
Note: All amounts reflect the April 1996 stock split.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
Financial Condition
Comments are for the balance sheet dated December 31, 1997
compared to the balance sheet dated December 31, 1996.
In 1997, Parkway continued the application of its strategy
of aggressively acquiring office properties and liquidating non-
core assets. During the year ended December 31, 1997, the
Company purchased 16 office properties, sold one office property
located outside its geographical area of focus, and sold five non-
core assets. Total assets increased $221,557,000 and office
properties (before depreciation) increased $229,765,000 or 174%.
Parkway's direct investment in office buildings and land
held for development increased $226,850,000 net of depreciation
to a carrying amount of $349,652,000 at December 31, 1997 and
consisted of 31 properties. During the year ending December 31,
1997, Parkway purchased 16 office properties as follows (in
thousands):
Purchase Purchase
Office Building Location Price Date
- ------------------------ ------------- -------- --------
Forum II & III Memphis, TN $ 16,425 01/07/97
Ashford II Houston, TX 2,207 01/28/97
Courtyard at Arapaho Dallas, TX 15,125 03/06/97
Charlotte Park Executive
Center Charlotte, NC 14,350 03/18/97
Meridian Building Atlanta, GA 10,500 03/31/97
Vestavia Centre Birmingham, AL 4,650 04/04/97
Sugar Grove Houston, TX 7,730 05/01/97
Lakewood II(a) Atlanta, GA 11,500 07/10/97
NationsBank Tower Columbia, SC 20,600 07/31/97
Fairway Plaza Dallas, TX 6,705 08/12/97
First Tennessee Plaza Knoxville, TN 29,876 09/18/97
Morgan Keegan Tower Memphis, TN 36,473 09/30/97
Hightower Centre Atlanta, GA 6,700 10/01/97
First Little Rock Plaza Little Rock, AR 10,200 11/07/97
Raytheon(b) Houston, TX 15,980 11/17/97
Greenbrier Towers Chesapeake, VA 16,000 11/25/97
--------
$225,021
========
(a)The Company assumed a $6,910,000 first mortgage with an
8.08% interest rate as part of the purchase.
(b)The Company assumed at $7,958,000 first mortgage with an
8.125% interest rate as part of the purchase.
In connection with the Charlotte Park Executive Center
purchase, the Company also purchased 17.64 acres of development
land in the same office park for $1,721,000. The Company
currently has no plans to begin development on the site.
Effective June 1, 1997, the Company increased its ownership
to 100% in the One Jackson Place office building. The 21.875%
minority interest was purchased for $1,272,000 cash and
assumption of the 21.875% pro rata share of the outstanding first
mortgage.
On June 1, 1997, the Company sold its investment in the
Cascade III office building in Columbus, Ohio and recognized a
loss of $6,000 for financial reporting purposes with net proceeds
from the sale of $1,424,000. With Parkway's primary focus in
office investments centered in the Southeastern United States and
Texas, the decision was made to sell Cascade III due to its
location.
During the year ending December 31, 1997, the Company
capitalized building improvements and additional purchase
expenses of $5,122,000 and recorded depreciation expense of
$4,874,000 related to its office property portfolio.
Parkway sold five non-core assets during the year that
resulted in gains for financial reporting purposes of $3,317,000
and net proceeds of $7,906,000. The non-core assets sold were
162 acres of land in Katy, Texas, a 180-unit apartment complex in
Winter Park, Florida, 20 acres of land in New Orleans, LA, the
Plantation Village Retail Center in Lake Jackson, TX and the
remaining assets owned by Golf Properties, Inc. In addition,
land held for sale decreased due to a write-down of $500,000
taken to reflect current market prices, as evidenced by a signed
contract with a third-party purchaser. At December 31, 1997, non-
core assets other than mortgage loans totaled $4,309,000. The
Company expects to continue its efforts to liquidate these
assets.
Notes payable to banks increased $6,473,000 as a result of
borrowings of $149,773,000 and payments of $143,300,000 under
bank lines of credit.
Mortgage notes payable increased $42,392,000 which includes
the placement of $30,000,000 of non-recourse mortgage loans and
scheduled principal payments of $2,475,000 made during the year
on existing notes payable without recourse. On November 12, 1997
the Company received funds totaling $15,000,000 from the
placement of non-recourse mortgage financing on an office
property located in Winston Salem, North Carolina. The loan is
fully amortizing over a 15-year period at a rate of 7.3%. On
December 15, 1997, the Company received funds totaling
$15,000,000 from the placement of non-recourse mortgage financing
on an office property located in Knoxville, Tennessee. The loan
is fully amortizing over a 15-year period at a rate of 7.17%.
The Company expects to continue seeking fixed rate, non-recourse
mortgage financing at terms ranging from ten to fifteen years on
select office building investments as additional capital is
needed. The Company plans to maintain a ratio of debt to total
market capitalization from 25% to 40% but anticipates that this
ratio may exceed 40% for some period of time following the
purchase of an asset pending the permanent financing of the
purchase with equity and/or long term, fixed rate debt.
Stockholders' equity increased $166,833,000 during the year
ended December 31, 1997 as a result of the following factors (in
thousands):
Increase (Decrease)
-------------------
Net income $ 14,491
Dividend declared and paid (8,769)
Exercise of stock options 395
Value of shares issued in
lieu of cash director's fees 55
Proceeds from shares issued
in stock offerings 160,661
--------
$166,833
========
On January 22, 1997, the Company completed the sale of
1,750,000 shares of common stock at $27.00 per share under its
existing shelf registration in a public offering. Effective
February 19, 1997, the Underwriters in this offering exercised
the over-allotment option and purchased an additional 262,500
shares. Net proceeds to the Company of these sales were
$51,221,000.
On September 24, 1997, the Company completed the sale of
3,000,000 shares of common stock at $33.6875 per share under its
existing shelf registration in a public offering. Effective
October 6, 1996, the Underwriters in this offering exercised the
over-allotment option and purchased an additional 450,000 shares.
Net proceeds to the Company of these sales were $109,440,000.
RESULTS OF OPERATIONS
Comments are for the year ended December 31, 1997 compared to the
year ended December 31, 1996.
Net income for the year ended December 31, 1997 was
$14,491,000 ($2.05 per share) as compared to $14,371,000 ($3.92
per share) for the year ended December 31, 1996 and included
$2,907,000 ($.41 per share) in net gains from the sale of non-
core assets. Net income for the year ended December 31, 1996
included $10,458,000 ($2.86 per share) in net gains from the sale
of non-core assets.
The primary reason for the increase in the Company's income
before gains for 1997 as compared to 1996 is the reflection of
the operations of the following office buildings subsequent to
the date of purchase:
Building Purchase Date
------------------------------- -------------
One Park 10 Plaza 03/07/96
400 North Belt 04/15/96
Woodbranch 04/15/96
Cherokee Business Center 07/09/96
8381 and 8391 Courthouse Road 07/09/96
Falls Pointe 08/09/96
Roswell North 08/09/96
BB&T Financial Center 09/30/96
Tensor 10/31/96
Forum II & III 01/07/97
Ashford II 01/28/97
Courtyard at Arapaho 03/06/97
Charlotte Park Executive Center 03/18/97
Meridian Building 03/31/97
Vestavia Centre 04/04/97
Sugar Grove 05/01/97
Lakewood II 07/10/97
NationsBank Tower 07/31/97
Fairway Plaza 08/12/97
First Tennessee Plaza 09/18/97
Morgan Keegan Tower 09/30/97
Hightower Centre 10/01/97
First Little Rock Plaza 11/07/97
Raytheon 11/17/97
Greenbrier Towers 11/25/97
Operations of office building properties are summarized
below (in thousands):
Year Ended
December 31
-----------------
1997 1996
------- -------
Income............. $45,799 $18,840
Operating expense.. (19,697) (8,466)
------- -------
26,102 10,374
Interest expense... (5,581) (3,526)
Depreciation and
amortization..... (6,033) (2,444)
Minority interest.. (59) 28
------- -------
Net income......... $14,429 $ 4,432
======= =======
In addition to the direct investments in office properties,
the Company owns the Wink Office Building in New Orleans,
Louisiana through a 50% ownership in the Wink/Parkway
Partnership. For the years ending December 31, 1997 and 1996,
income of $46,000 and $49,000 was recorded on the equity method
of accounting. At December 31, 1997, the carrying value of this
investment totaled $323,000.
The effect on the Company's operations related to the BB&T
Financial Center included in the operations of office buildings
is as follows (in thousands):
Year Ended
December 31
---------------
1997 1996 (1)
------ ------
Revenue............ $4,478 $1,099
Operating expenses. (1,459) (333)
Interest expense... (148) -
Depreciation....... (591) (149)
------ ------
Net income ........ $2,280 $ 617
====== ======
(1) Operations for 1996 includes operations from September
30, 1996, the date of purchase, through December 31, 1996.
Operations of other real estate properties held for sale are
summarized below (in thousands):
Year Ended
December 31
-----------------
1997 1996
------- -------
Income from other real
estate properties.... $ 722 $ 1,773
Real estate
operating expenses... (462) (1,379)
------- -------
Net income............. $ 260 $ 394
======= =======
The Company also has the following parcels of undeveloped
land held for sale at December 31, 1997 (dollars in thousands):
Description Location Size Book Value
------------------- --------------- --------- -----------
Bullard Road New Orleans, LA 60 acres $2,921
Sugar Land Triangle Sugar Land, TX 7 acres 868
Sugar Creek Center Sugar Land, TX 4 acres 520
------
$4,309
======
The decrease in interest income on mortgage loans is due
primarily to sales of mortgage loans during 1996. In May 1996,
the Company sold 157 mortgage loans. In December 1996, the
Company sold its only wrap mortgage loan with a principal balance
of $16,529,000 and 8.58% interest rate and subsequently repaid
the associated wrap debt on that mortgage loan, accounting for
the decrease in interest expense on wrap mortgages. On December
31, 1997, the Company sold the Plantation Village retail center
for $2,500,000 cash and a note receivable of $900,000 with a 10%
interest rate. The note matures December 31, 2007 and payments
are based on a 15-year amortization with a seven-year call. At
December 31, 1997, the Company's investment in mortage loans
included three mortgage loans totaling $1,117,000 with an average
interest rate of 10%.
Comments are for the year ended December 31, 1996 compared to the
year ended December 31, 1995.
Net income increased to $14,371,000 for the year ended
December 31, 1996 as compared to $11,820,000 for the year ended
December 31, 1995 primarily as a result of significant increases
in income from office buildings to $18,840,000 in 1996 from
$6,918,000 in 1995 net of related expenses of $14,408,000 in 1996
and $6,243,000 in 1995. These increases are reflective of
increases in the Company's office building portfolio due to
acquisitions made during 1996 and 1995. The portfolio of office
properties increased from 392,087 square feet at December 31,
1994 to 838,799 square feet at December 31, 1995 and increased
further to 1,973,530 square feet at December 31, 1996. Included
in net income were gains on real estate held for sale, mortgage
loans and securities of $10,458,000 in 1996 and $10,866,000 in
1995, reflecting primarily sales of the Company's non-office
building assets.
Operations of office building properties are summarized
below (in thousands):
Year Ended
December 31
-------------------
1996 1995
-------- -----
- ---
Income from real estate properties...$18,840 $ 6,918
Real estate operating expense........(8,466) (2,960)
------- -------
10,374 3,958
Interest expense on real estate
properties.........................(3,526) (2,204)
Depreciation and amortization........(2,444) (1,179)
Minority interest....................28 100
------- -------
Net income........................... $ 4,432 $ 675
======= =======
The Company's operations for 1996 and 1995 reflect the
operations of the following office buildings subsequent to the
date purchased:
Building Purchase Date
---------------------- -------------
Mtel Centre' 07/31/95
IBM Building 10/02/95
Waterstone 12/18/95
One Park 10 Plaza 03/07/96
400 North Belt 04/15/96
Woodbranch 04/15/96
Cherokee Business Center 07/09/96
8381 and 8391 Courthouse Road 07/09/96
Falls Pointe 08/09/96
Roswell North 08/09/96
BB&T Financial Center 09/30/96
Tensor 10/31/96
In addition to the office properties owned directly, the
Company owned the Wink Office Building in New Orleans, Louisiana
through a 50% ownership in the Wink/Parkway Partnership. Income
from the partnership of $49,000 and $47,000 was recorded on the
equity method of accounting during the years ended December 31,
1996 and 1995, respectively.
Operations of other real estate properties held for sale are
summarized below (in thousands):
Year Ended
December 31
-------------------
1996 1995
-------- --------
Income from real estate properties.. $ 1,773 $ 2,023
Real estate operating expense....... (1,379) (1,916)
------- -------
394 107
Interest expense on real estate
properties........................ - (26)
Depreciation and amortization....... - (152)
------- -------
Net income (loss)................... $ 394 $ (71)
======= =======
The decrease in revenue from other real estate properties
held for sale for the year ended December 31, 1996 compared to
1995 is primarily due to the June 1996 sale of the Oak Creek
Apartments and the August 1995 sale of the American Inn North
Motel. The decrease also reflects sales in 1996 of 21 townhomes
located in Corpus Christi and Houston, Texas, seven residential
lots and approximately 71 acres of land. In 1995, the Company
sold four townhomes in Corpus Christi, Texas, six foreclosed
homes in San Antonio, Texas and various residential lots and
parcels of real estate. These decreases were offset by increases
in revenue and operating expense due to the acquisition of the
minority interest holder's interest in the Club at Winter Park
during 1996 to facilitate the sale of the property.
At December 31, 1996, the Company owned two operating
properties that were held for sale with a carrying value of
$3,675,000. These properties were as follow: 1) Club at Winter
Park, an 180 unit apartment complex located in Winter Park, FL
with a carrying value of $2,183,000 and 2) Plantation Village, a
57,000 square foot retail center located in Lake Jackson, TX with
a carrying value of $1,492,000.
The Company also owned the following parcels of undeveloped
land that were held for sale (in thousands):
Description Location Size Book Value
------------------ --------------- --------- ----------
-
Bullard Road New Orleans, LA 80 acres $3,799
Sugar Land Sugar Land, TX 7 acres 868
Triangle
Sugar Creek Center Sugar Land, TX 4 acres 520
Green-Busch Road Houston, TX 162 acres 477
------
$5,664
======
The net increase in interest on mortgage loans during the
year ended December 31, 1996 compared to 1995 reflects many
changes in the investment in mortgage loans over the past two
years. Increases in interest income from mortgages are due to
the loans received in the April 27, 1995 merger with EB, Inc.,
loans made to facilitate sales in 1995 and loans purchased during
1996. Decreases in interest income from mortgage loans are
primarily due to payoffs of loans received in 1995 and the May
1996 sale of 157 mortgage loans. In addition, the Company sold
one mortgage loan in December 1996 with a principal balance of
$16,529,000 and 8.58% interest rate. At December 31, 1996, the
Company's investment in mortgage loans totaled $350,000 and
included 3 loans with an average rate of 10%.
Gains on sales of securities, real estate and mortgage loans
for 1996 were the result of implementing the Company's investment
strategy discussed previously. Cash proceeds from the sale of
securities totaled $2,834,000 and resulted in gains of $549,000.
Gains on real estate and mortgage loans were a result of the sale
of 158 mortgage loans in two separate transactions, gains
recognized on the collection of mortgage loans, writedowns to
land and the sale of other non-core assets. Cash proceeds from
these sales totaled $24,983,000 and net gains recognized were
$9,909,000.
The increase in interest on investments reflects higher cash
balances invested in interest bearing accounts during 1996 as
compared to 1995.
Decreases in dividend income for the year ended December 31,
1996 compared to 1995 reflect the sales of dividend-paying
securities held by the Company during 1996 and 1995.
Interest expense on notes payable on wrap mortgages reflects
interest expense on debt received in the April 1995 merger of EB,
Inc. Notes payable on wrap mortgages were paid off in 1996
following the sale of the corresponding mortgage loan receivable.
The increase in general and administrative expenses from
$2,381,000 in 1995 to $3,013,000 in 1996 is primarily due to an
increase in costs as a result of recent mergers and acquisitions
and the cost associated with the Company's move to the New York
Stock Exchange from the NASDAQ National Market System. Effective
August 1996, the Company was listed on the New York Stock
Exchange (NYSE). Included in general and administrative expenses
is a one-time listing fee of $78,000. The EB, Inc. merger was
effective April 27, 1995, therefore, general and administrative
expenses of EB, Inc. for only eight months have been included in
1995 compared to twelve months of expenses included in 1996.
Professional fees also increased as compared to 1995, reflecting
primarily the $65,000 cost of conducting an odd-lot tender
program to reduce the number of shareholders owning less than 100
shares of stock as a result of the mergers. The EB, Inc. merger,
resulted in over 4,000 new shareholders for the Company which
also contributed to a $92,000 increase in shareholder reporting
expenses. Other increases in general and administrative expenses
were the result of additional overhead to manage the Company's
significant growth through property acquisitions during 1996 and
1995.
LIQUIDITY AND CAPITAL RESOURCES
Statement of Cash Flows
Cash and cash equivalents were $959,000 and $8,053,000 at
December 31, 1997 and 1996, respectively. The Company generated
$17,554,000 in cash flows from operating activities during the
year ended December 31, 1997 compared to $7,370,000 for the same
period of 1996, an increase primarily attributable to the
significant increase in the number of office properties owned by
the Company. The Company experienced significant investing
activity during the year ending December 31, 1997 with a net of
$210,933,000 being invested. In implementing its investment
strategy, the Company used $211,874,000, not including closing
costs and certain capitalized expenses, to purchase office
properties and development land while receiving net cash proceeds
from the sale of non-core assets and office properties of
$9,330,000. The Company also spent $8,619,000 including closing
costs and capital improvements at its office properties and non-
core operating real estate properties. The Company received net
proceeds of $51,221,000 from the sale of 2,012,500 shares of
common stock during the first quarter of 1997 and net proceeds of
$109,440,000 from the sale of 3,000,000 shares of common stock
during the third quarter of 1997 and 450,000 shares in the fourth
quarter of 1997. Cash dividends of $8,769,000 ($1.20 per share)
were paid to shareholders and principal payments of $2,475,000
were made on mortgage notes payable during the year ending
December 31, 1997.
Liquidity
At December 31, 1997, the Company had $55,000,000 available
on its acquisition line of credit and $ 8,527,000 available on
its working capital line of credit with Deposit Guaranty National
Bank in Jackson, Mississippi. The Company plans to continue
actively pursuing the purchase of office building investments
that meet the Company's investment criteria and intends to use
these lines of credit, proceeds from the sale of non-core assets
and cash balances to fund those acquisitions. At December 31,
1997, the lines of credit had an interest rate equal to the 90-
day LIBOR rate plus 1.75% (adjusted quarterly), interest due
monthly and annual commitment fees of .125%. In addition, both
lines of credit had fees of .125% on the unused balances due
quarterly. Prior to March 27, 1997, the interest rates on both
lines of credit equaled the 90-day LIBOR rate plus 2.35% adjusted
quarterly. The acquisition line of credit and the working capital
line of credit mature June 30, 1998.
At December 31, 1997, the Company had $105,220,000 of non-
recourse fixed rate mortgage notes payable with an average
interest rate of 7.81% secured by office properties and
$6,473,000 drawn under bank lines of credit. Based on the
Company's total market capitalization of approximately
$335,068,000 at December 31, 1997 (using the December 31, 1997
closing price of $34.3125 per share) the Company's debt
represented approximately 25% of its total market capitalization.
The Company plans to maintain a ratio of debt to total market
capitalization from 25% to 40%, although such ratio may from time
to time temporarily exceed 40%, especially when the Company has
incurred significant amounts of short term debt in conection with
property acquisitions.
Subsequent to December 31, 1997, the Company purchased the
Schlumberger Building (previously known as the Veritas Building)
for $12,200,000. The Schlumberger Building is a 155,000 square
foot building with 450 surface parking spaces. This purchase was
funded with advances under existing lines of credit.
On February 25, 1998, the Company purchased a 13-building
portfolio totaling 1,470,000 net rentable square feet that
included properties located in five of its primary markets and
three new markets. The breakdown of the 13 building office
portfolio by market is listed below:
Number of Net Rentable Percentage of
Location Properties Square Feet Portfolio
------------------ ---------- ------------ -------------
Houston, TX 2 536,000 36.4%
Dallas, TX 2 251,000 17.0%
Ft. Lauderdale, FL 2 215,000 14.6%
Richmond, VA 3 179,000 12.2%
Knoxville, TN 1 89,000 6.2%
Chesapeake, VA 1 82,000 5.6%
Northern VA 1 72,000 4.9%
Greenville, SC 1 46,000 3.1%
-- --------- ------
Total 13 1,470,000 100.0%
== ========= ======
The purchase price of this portfolio totaled $163,014,000
and was funded by advances on existing lines of credit, a
$75,000,000 unsecured loan from NationsBank, NA and the proceeds
of two stock offerings discussed in greater detail below. The
NationsBank, NA facility requires the negative pledge of the 13
office properties purchased February 25, 1998, matures August 25,
1998, and has an interest rate of 7.025% until April 24, 1998.
Thereafter the loan will have an interest rate of LIBOR plus
1.40%. In connection with the portfolio purchase, the Company
increased its acquisition line from $55,000,000 to $85,000,000
effective February 25, 1998 and reduced the interest rate on both
lines of credit from the 90-day LIBOR rate plus 1.75% to the 30-
day LIBOR rate plus 1.40%. The lines of credit call for monthly
interest payments, annual commitment fees of .35% and quarterly
unused fees of .175%.
The Company has committed a $97,000,000 fixed rate loan at
6.945% that amortizes over a 15-year term and matures ten years
from the date the loan closes. This loan will be secured by the
13 properties acquired in the February 25, 1998 portfolio
purchase and will be used to repay the NationsBank, NA loan of
$75,000,000. The loan also contains a conversion feature that
will give the Company an option to unsecure all or part of the
loan upon receipt of an investment grade rating from two of the
major rating agencies during the first 24 months of the loan.
Subsequent to year end, the Company completed two stock
transactions. On February 23, 1998, the Company completed the
sale of 451,528 shares of common stock under its existing shelf
registration to a unit investment trust with net proceeds to the
Company of $14,231,000. On March 11, 1998, the Company completed
the sale, through direct placement, of 855,900 shares of common
stock to institutional investors with net proceeds to the Company
of $26,948,000.
The Company presently has plans to make capital improvements
at its office properties in 1998 of approximately $15,000,000.
These expenses include tenant improvements, capitalized
acquisition costs and capitalized building improvements.
Approximately $9,000,000 of these improvements relate to upgrades
and improvements to properties acquired in 1996 and 1997 that
were anticipated at the time of purchase. All such improvements
are expected to be financed by cash flow from the properties and
advances on bank lines of credit.
In the routine management of its portfolio of office
properties, the Company evaluates changes in market conditions
that indicate an opportunity or need to sell properties within
that market in order to maximize shareholder value. The Company
also evaluates other factors, including its ability to purchase
sufficient property in a market to justify the implementation of
self management, the speculative development of new office
properties within the market and the demand for office space
within the market as evidenced by job growth and office space
absorption in deciding whether or not a property should be sold.
As a result of this evaluation, the Company has decided to
attempt to sell its properties located in the Northern Virginia
market. The Company has made numerous attempts to purchase
sufficient property in the market to justify the implementation
of self management but has been unsuccessful, as prices have
risen to amounts that make it difficult or impossible to make
purchases that meet the Company's buying criteria. There can be
no assurance that the Company will be able to sell these
properties or on what terms such sale would occur.
The Company anticipates that its current cash balance,
operating cash flows and borrowings (including borrowings under
the working capital line of credit) will be adequate to pay the
Company's (i) operating and administrative expenses, (ii) debt
service obligations, (iii) distributions to shareholders, (iv)
capital improvements, and (v) normal repair and maintenance
expenses at its properties both in the short and long term.
Funds From Operations
Management believes that funds from operations ("FFO") is an
appropriate measure of performance for equity REITs. Funds from
operations is defined by the National Association of Real Estate
Investment Trusts (NAREIT) as net income or loss, excluding gains
or losses from debt restructuring and sales of properties, plus
depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. In March 1995,
NAREIT issued a clarification of the definition of FFO. The
clarification provides that amortization of deferred financing
costs and depreciation of non-real estate assets are not to be
added back to net income to arrive at FFO. Funds from operations
does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is
not an indication of cash available to fund cash needs. Funds
from operations should not be considered an alternative to net
income as an indicator of the Company's operating performance or
as an alternative to cash flow as a measure of liquidity.
The following table presents the Company's FFO for the years
ended December 31, 1997 and 1996 (in thousands):
Year Ended
December
-----------------
1997 1996
------- -------
Net income............................. $14,491 $14,371
Adjustments to derive
funds from operations:
Depreciation and amortization......... 6,033 2,444
Minority interest depreciation........ (56) (181)
Equity in earnings....................(46) (132)
Distributions from
unconsolidated subsidiaries.......... 42 358
Gain on real estate.................. (2,907)
(9,909)
Gain on marketable securities......... - (549)
Amortization of discounts,
deferred gains and other............. (1) (23)
------- -------
Funds from operations................. $17,556 $ 6,379
======= =======
NAREIT has recommended supplemental disclosure concerning
certain capital expenditures, leasing costs and straight-line
rents as shown below (in thousands):
Year Ended
December 31
-----------------
1997 1996
------- -------
Straight-line rents.................. $ 352 $ (243)
Building improvements................ 461 207
Tenant improvements:
New leases.........................494 326
Lease renewals.....................1,742 528
Leasing commissions:
New leases.........................434 84
Lease renewals.....................1,570 -
Non-core asset improvements.......... 27 304
Leasing commissions amortized........391 70
Upgrades on acquisitions anticipated
at the date of purchase ...........1,902 588
Inflation
In the last five years, inflation has not had a significant
impact on the Company because of the relatively low inflation
rate in the Company's geographic areas of operation. Most of the
leases require the tenants to pay their pro rata share of
operating expenses, including common area maintenance, real
estate taxes and insurance, thereby reducing the Company's
exposure to increases in operating expenses resulting from
inflation. In addition, the Company's leases typically have
three to five year terms, which may enable the Company to replace
existing leases with new leases at a higher base rent if rents on
the existing leases are below the then-existing market rate.
Forward-Looking Statements
In addition to historical information, certain sections of
this Form 10-K may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, such as those
pertaining to the Company's capital resources, profitability and
portfolio performance and estimates of market rental rates.
Forward-looking statements involve numerous risks and
uncertainties. The following factors, among others discussed
herein, could cause actual results and future events to differ
materially from those set forth or contemplated in the forward-
looking statements: defaults or non-renewal of leases, increased
interest rates and operating costs, failure to obtain necessary
outside financing, difficulties in identifying properties to
acquire and in effecting acquisitions, failure to qualify as a
real estate investment trust under the Internal Revenue Code of
1986, as amended, environmental uncertainties, risks related to
natural disasters, financial market fluctuations, changes in real
estate and zoning laws and increases in real property tax rates.
The success of the Company also depends upon the trends of the
economy, including interest rates, income tax laws, governmental
regulation, legislation, population changes and those risk
factors discussed elsewhere in this Form 10-K. Readers are
cautioned not to place undue reliance on forward-looking
statements, which reflect management's analysis only as of the
date hereof. The Company assumes no obligation to update forward-
looking statements.
Impact of Year 2000
The Company operates in a PC-based computer environment and
maintains its accounting, property and internal control systems
utilizing non proprietary software systems. The Company has
contacted vendors of its significant software systems and
received representations that all such software systems have been
changed, or will be changed prior to June 30, 1999, to be year
2000 compliant. All major computer hardware that supports the
Company's local area network and newly installed wide area
network has been purchased within the past eighteen months and is
known to be year 2000 compliant. The Company has formed a team
of employees to evaluate the Company's building systems, such as
heating, air conditioning, elevators, and security systems to
determine year 2000 compliance. This evaluation has not been
completed. The total year 2000 analysis cost is estimated to be
immaterial to the Company's consolidated financial position and
operations. Such costs will be expensed as incurred. To date,
the Company has incurred and expensed immaterial amounts for
assessment of the year 2000 issue.
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements Page
Report of Independent Auditors . . . . . . . . . . . . . . . .29
Consolidated Balance Sheets-
as of December 31, 1997 and 1996 . . . . . . . . . . . . . .30
Consolidated Statements of Income-
for the years ended December 31, 1997, 1996 and 1995 . . . .31
Consolidated Statements of Cash Flows-
for the years ended December 31, 1997, 1996 and 1995 . . . .32
Consolidated Statements of Stockholders' Equity-
for the years ended December 31, 1997, 1996 and 1995 . . . .34
Notes to Consolidated Financial Statements . . . . . . . . . .35
Schedule III - Real Estate and Accumulated Depreciation. . . .51
Notes to Schedule III - Real Estate and Accumulated
Depreciation . . . . . . . . . . . . . . . . . . . . . . . .55
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Parkway Properties, Inc.
We have audited the accompanying consolidated balance sheets
of Parkway Properties, Inc. and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1997. Our audit also included
the financial statement schedule listed in the index under Item
14. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Parkway Properties, Inc. and subsidiaries
at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth herein.
/s/ Ernst & Young LLP
---------------------------
Ernst & Young LLP
Jackson, Mississippi
February 9, 1998,
except for Note H,
as to which the date
is February 25, 1998
PARKWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)
December 31 December 31
1997 1996
------------ -----------
Assets
Real estate related investments:
Office buildings.......................$362,074 $132,309
Land held for development.............. 1,721 -
Accumulated depreciation...............(14,143) (9,507)
-------- --------
349,652 122,802
Real estate held for sale:
Land................................. 4,309 5,664
Operating properties................. - 3,675
Other non-core real estate assets.... - 381
Mortgage loans......................... 1,117 350
Real estate partnership................ 323 319
-------- --------
355,401 133,191
Interest, rents receivable and other
assets................................. 12,232 5,791
Cash and cash equivalents................ 959 8,053
-------- --------
$368,592 $147,035
======== ========
Liabilities
Notes payable to banks...................$ 6,473 $ -
Mortgage notes payable without recourse.. 105,220 62,828
Accounts payable and other liabilities... 12,158 6,299
----------------
123,851 69,127
-------- --------
Stockholders' Equity
Common stock, $.001 par value, 70,000,000
shares authorized and 9,765,176 and
4,257,534 shares issued and outstanding
in 1997 and 1996, respectively......... 10 4
Additional paid-in capital............... 213,461 52,356
Retained earnings........................ 31,270 25,548
-------- --------
244,741 77,908
-------- --------
$368,592 $147,035
======== ========
See notes to consolidated financial statements.
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended December 31
------------------------------
1997 1996 1995
--------- --------- ---------
Revenues
Income from office properties.... $45,799 $18,840 $ 6,918
Income from other real estate
properties...................... 722 1,773 2,023
Interest on mortgage loans....... 63 1,740 1,421
Management company income........ 539 784 1,041
Interest on investments.......... 373 500 167
Dividend income.................. 388 118 601
Deferred gains and other income.. 203 324 596
------- -------- --------
48,087 24,079 12,767
------- -------- --------
Expenses
Office properties:
Operating expense............... 19,697 8,466 2,960
Interest expense:
Contractual.................... 5,486 3,467 2,204
Amortization of loan costs..... 95 59 -
Depreciation and amortization.... 6,033 2,444 1,179
Minority interest............... 59 (28) (100)
Other real estate properties:
Operating expense............... 462 1,379 1,916
Interest expense................ - - 26
Depreciation and amortization... - - 152
Interest expense on bank notes:
Contractual..................... 810 281 156
Amortization of loan costs...... 187 72
Interest expense on wrap mortgages - 340 135
Management company expenses...... 362 673 804
General and administrative....... 3,312 3,013 2,381
------- -------- --------
36,503 20,166 11,813
------- -------- --------
Income before gains.............. 11,584 3,913 954
Gain on sales
Gain on real estate held
for sale and mortgage loans..... 2,907 9,909 6,552
Gain on securities............... - 549 4,314
------- ------- --------
Net income....................... $14,491 $14,371 $ 11,820
======= ======= ========
Net income per share:
Basic.......................... $ 2.05 $ 3.92 $ 4.24
======= ======= ========
Diluted........................ $ 2.01 $ 3.81 $ 4.16
======= ======= ========
Weighted average shares
outstanding:
Basic.......................... 7,078 3,662 2,787
======= ======= ========
Diluted........................ 7,214 3,776 2,844
======= ======= ========
Dividends paid per share......... $ 1.20 $ .62 $ .44
======= ======= ========
See notes to consolidated financial statements.
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31
----------------------------
1997 1996 1995
-------- -------- --------
Operating Activities
Net income.........................$ 14,491 $ 14,371 $ 11,820
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization.... 6,033 2,444 1,301
Gain on real estate held for
sale and mortgage loans........ (2,907) (9,909) (6,552)
Gain on securities............... - (549) (4,314)
Equity in earnings and other..... (5) 203 2
Changes in operating assets
and liabilities:
Increase in receivables........ (5,017) (1,467) (370)
Increase in accounts payable
and accrued expenses......... 4,959 2,277 768
-------- -------- --------
Cash provided by operating
activities....................... 17,554 7,370 2,655
-------- -------- --------
Investing Activities
Payments received on mortgage loans 230 400 3,038
Purchase of real estate securities. - - (992)
Purchase of real estate related
investments......................(213,863) (73,777) (29,568)
Investment in unconsolidated
subsidiary....................... - (325) -
Purchase of mortgage loans......... - (600) (1,420)
Proceeds from sale of real estate
held for sale and mortgage loans. 9,330 24,983 8,789
Proceeds from sale of real estate
securities....................... - 2,834 20,100
Improvements to real estate related
investments...................... (6,630) (2,037) (728)
Proceeds from merger of EB, Inc.... - - 2,702
-------- -------- --------
Cash provided by (used in)
investing activities...............(210,933) (48,522) 1,921
-------- -------- --------
Financing Activities
Principal payments on mortgage
notes payable.................... (2,475) (6,727) (4,559)
Proceeds from borrowings on
mortgage notes payable........... 30,000 34,970 11,000
Proceeds from bank borrowings.......149,773 11,805 19,344
Principal payments on
bank borrowings..................(143,300) (11,805) (23,498)
Stock options exercised............ 395 858 110
Dividends paid..................... (8,769) (2,552) (1,249)
Proceeds from sale of stock........ 160,661 16,612 -
-------- -------- --------
Cash provided by financing
activities....................... 186,285 43,161 1,148
-------- -------- --------
Increase (decrease) in cash
and cash equivalents.............. (7,094) 2,009 5,724
Cash and cash equivalents at
beginning of year................ 8,053 6,044 320
-------- -------- --------
Cash and cash equivalents at
end of year.......................$ 959 $ 8,053 $ 6,044
======== ======== ========
See notes to consolidated financial statements.
PARKWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Year Ended December 31
---------------------------
1997 1996 1995
-------- -------- -------
- -
Common stock, $.001 par value
Balance at beginning of year........ $ 4 $ 2,008 $ 1,563
Shares issued - EB, Inc. merger..... - - 429
Shares issued - stock dividend...... - 1,006 -
Shares issued - stock offerings..... 5 1,140 -
Stock options exercised............. 1 37 16
Reincorporation in Maryland......... - (4,187) -
-------- ----------------
Balance at end of year.............. 10 4 2,008
-------- ----------------
Additional paid-in capital
Balance at beginning of year........ 52,356 32,882 26,847
Shares issued - EB merger........... - - 5,941
Shares issued - stock dividend...... - (1,006) -
Shares issued - stock offerings..... 160,656 15,472 -
Shares issued in lieu of cash
director's fees................... 55 - -
Stock options exercised............. 394 821 94
Reincorporation in Maryland......... - 4,187 -
-------- ----------------
Balance at end of year.............. 213,461 52,356 32,882
-------- ----------------
Retained Earnings
Balance at beginning of year........ 25,548 13,729 3,158
Net income.......................... 14,491 14,371 11,820
Cash dividends declared and paid.... (8,769) (2,552) (1,249)
-------- ----------------
Balance at end of year.............. 31,270 25,548 13,729
-------- ----------------
Unrealized Gain on Securities
Balance at beginning of year........ - 592 670
Unrealized gain on securities....... - (592) (78)
-------- ----------------
Balance at end of year.............. - - 592
-------- ----------------
Total stockholders' equity............$244,741 $ 77,908$ 49,211
======== ================
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts
of Parkway Properties, Inc.("Parkway" or "the Company) and its
100% owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
Business
The Company's operations are exclusively in the real estate
industry, principally with acquisition, operation and management
of office buildings.
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash equivalents
The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be
cash equivalents.
Investments in unconsolidated subsidiaries
The Company shares voting control in the
Wink/Parkway Partnership with a partner and, accordingly,
accounts for its investment using the equity method of
accounting.
Real estate properties
Gains from sales of real estate are recognized based on the
provisions of Statement of Financial Accounting Standards
("SFAS") No. 66 which require upon closing, the transfer of
rights of ownership to the purchaser, receipt from the purchaser
of an adequate cash down payment and adequate continuing
investment by the purchaser. If the requirements for recognizing
gains have not been met, the sale and related costs are recorded,
but the gain is deferred and recognized generally on the
installment method of accounting as collections are received.
Real estate properties are carried at cost less accumulated
depreciation. Cost includes the carrying amount of the Company's
investment plus any additional consideration paid, liabilities
assumed, costs of securing title (not to exceed fair market value
in the aggregate) and improvements made subsequent to
acquisition. Depreciation of buildings is computed using the
straight-line method over their estimated useful lives of 40
years. Depreciation of tenant improvements including personal
property is computed using the straight-line method over the term
of the lease involved. Maintenance and repair expenses are
charged to expense as incurred, while improvements are
capitalized and depreciated in accordance with the useful lives
outlined above. Geographically, the Company's properties are
concentrated in the Southeastern United States and Texas.
Revenue from real estate rentals is recognized and accrued
as earned on a pro rata basis over the term of the lease.
Management continually evaluates the Company's office
buildings and the markets they have office properties in to
ensure that these buildings continue to meet their investment
criteria. During 1997 management implemented a self management
strategy for the Company's office buildings which will require
the Company to have minimum square footage in an area in order
for the strategy to be cost effective. If the office properties
no longer meet management's investment criteria or the management
of the building is not cost effective, management may consider a
sale of the office property. If such a sale becomes probable,
the office property is classified as available for sale.
Management fee income and leasing and brokerage commissions
are recorded in income as earned. Such fees on Company-owned
properties are eliminated in consolidation.
Non-core assets (see Note C) are carried at the lower of
fair value minus estimated costs to sell or cost. Operating real
estate held for investment is stated at the lower of cost or net
realizable value.
Effective January 1, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be
Disposed Of". SFAS No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the
assets' carrying amount. The effect of this adoption was not
material to the Company's financial position or results of its
operations.
Interest income recognition
Interest is generally accrued monthly based on the
outstanding loan balances. Recognition of interest income is
discontinued whenever, in the opinion of management, the
collectibility of such income becomes doubtful. After a loan is
classified as non-earning, interest is recognized as income when
received in cash.
Amortization
Debt origination costs are deferred and amortized using
the straight-line method over the term of the loan.
Leasing commissions are deferred and amortized using the straight-
line method over the term of the respective lease.
Stock based compensation
The Company grants stock options for a fixed number of
shares to employees with an exercise price equal to or above the
fair value of the shares at the date of grant. The Company
accounts for stock option grants in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees", and,
accordingly, recognizes no compensation expense for the stock
option grants.
Income taxes
Income taxes have been provided using the liability
method with SFAS No. 109, "Accounting for Income Taxes".
Deferred income taxes reflect the net tax effects of (a)
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes and (b) operating loss and tax credit
carryforwards.
Net Income Per Common Share
On April 30, 1996, the Company completed a 3 for 2 common
stock split, effected in the form of a stock dividend of one
share for every two shares outstanding. All per share data and
share data has been adjusted retroactively for stock dividends
and splits.
In 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings per Share". SFAS No. 128 replaced
the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS No. 128
requirements.
Year Ended
December 31
---------------------------
1997 1996 1995
------- ------- -------
Numerator:
Basic and diluted net
income $14,491 $14,371 $11,820
Denominator:
Basic weighted average
shares 7,078 3,662 2,787
Effect of employee
stock options and
warrants 136 114 57
Diluted weighted
average shares 7,214 3,776 2,844
New Accounting Pronouncements
Effective for 1997, SFAS No. 129, "Disclosure of Information
about Capital Structure", established new standards for
disclosures pertaining to an entity's capital structure. SFAS
No. 129 had no impact on the Company in 1997.
Effective for 1998, SFAS No. 130, "Reporting Comprehensive
Income", requires that items required to be recognized as
components of comprehensive income be reported in a financial
statement displayed with the same prominence as other financial
statements. Management does not expect SFAS No. 130 to have a
significant impact on the Company in 1998.
Effective for 1998, SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", requires that
a public company report financial and descriptive information
about its reportable operating segments. Management does not
expect SFAS No. 131 to have a significant impact on the Company
in 1998.
Reclassifications
Certain reclassifications have been made in the 1996 and
1995 financial statements to conform to the 1997 classifications.
NOTE B - Investment in Office Properties
At December 31, 1997, Parkway owned or had a direct interest
in 31 office properties located in 10 states with an aggregate of
4,614,000 square feet of leasable space. During the year ended
December 31, 1997, the Company purchased 16 office properties as
follows:
Number
Property (1) Investment
Of
Market Location Cost Properties
Properties
- -------------------- ---------- --------
---
Houston, TX (1) $ 25,917 3
Dallas, TX 21,830 2
Atlanta, GA (2) 28,700 3
Charlotte, NC 14,350 1
Memphis, TN 52,898 2
Knoxville, TN 29,876 1
Columbia, SC 20,600 1
Chesapeake, VA 16,000 1
Little Rock, AR 10,200 1
Other 4,650 1
-------- -----
Total 1997 Purchases $225,021 16
======== =====
(1)The Company assumed a $7,958,000 first mortgage
on one property with an 8.125% interest rate as part of
the purchase.
(2)The Company assumed a $6,910,000 first mortgage
on one property with an 8.08% interest rate as part of
the purchase.
In connection with the Charlotte Park Executive Center
purchase, the Company also purchased 17.64 acres of development
land in the same office park for $1,721,000. The Company
currently has no plans to begin development on the site.
The unaudited pro forma effect on the Company's results of
operations of the 1997 purchases as if the purchases had occurred
on January 1, 1996 is as follows (in thousands):
Year Ended
December 31
-------------------
1997 1996
-------- --------
Revenues $20,097 $35,958
Net income $ 8,265 $13,705
Basic earnings per share $ 1.17 $ 3.74
Diluted earnings per share $ 1.15 $ 3.63
Pro-forma results do not proport to be indicative of actual
results had the purchases been made at January 1, 1996 or the
results that may occur in the future.
In addition to the 31 properties owned directly, the Company
also owns a 50% interest in one office property in New Orleans,
Louisiana through an investment in a real estate partnership.
The building is 32,325 net rentable square feet and 100% of the
building is leased and occupied by the other 50% partner, an
unrelated party. The carrying amount of the partnership interest
at December 31, 1997 and 1996 was $323,000 and $319,000
respectively.
The following is a schedule by year of future
approximate minimum rental receipts under noncancelable leases
for office buildings owned as of December 31, 1997 (in
thousands):
1998 $ 61,328
1999 56,738
2000 46,731
2001 39,886
2002 31,451
Subsequently 69,776
--------
$305,910
========
NOTE C - Non-Core Assets
At December 31, 1997, Parkway's investment in non-core
assets consisted of the following (in thousands):
Size Location Book Value
- -------------- --------------- ----------
11 acres Sugar Land, TX $ 1,388
60 acres New Orleans, LA 2,921
Mortgage Loans Texas 1,117
-------
$ 5,426
=======
There were three mortgage loans outstanding at December 31,
1997 secured by land, residential real estate and a retail
center.
NOTE D - Notes Payable
Notes payable to banks
At December 31, 1997, the Company had a $55,000,000
acquisition line of credit and a $15,000,000 working capital line
of credit with Deposit Guaranty National Bank in Jackson,
Mississippi. At December 31, 1997, the lines of credit had an
interest rate equal to the 90-day LIBOR rate plus 1.75% (adjusted
quarterly), interest due monthly and annual commitment fees of
.125%. In addition, both lines of credit have fees of .125% on
the unused balances due quarterly. Effective February 25, 1998,
the acquisition line of credit was increased to $85,000,000 and
the interest rate on both lines was decreased to a rate equal to
the 30-day LIBOR rate plus 1.40% adjusted quarterly. The lines
of credit call for monthly interest payments, annual commitment
fees of .35% and quarterly unused fees of .175%. The interest
rate on the note was 7.5313% as of December 31, 1997 and 7.032%
as of March 25, 1998. The acquisition line of credit and the
working capital line of credit mature June 30, 1998.
Mortgage notes payable without recourse
A summary of mortgage notes payable at December 31, 1997, which are non-
recourse to the Company, is as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Note Balance
Amount ----------------
Office Interest Monthly Maturity of December 31
Building Rate Payment Date Collateral 1997 1996
- --------------------------- --------- ------- --------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
One Jackson Place 7.850% $152 11/10 $18,872 $17,501 $17,934
BB&T Financial Center 7.300% 137 10/12 23,869 15,000 -
First Tennessee Plaza 7.170% 136 12/12 30,064 15,000 -
Mtel Centre' 7.750% 118 01/08 13,394 9,796 10,422
Raytheon 8.125% 89 09/08 15,998 7,923 -
Lakewood II 8.080% 66 08/06 11,406 6,809 -
400 North Belt 8.250% 65 08/11 10,534 6,386 6,634
Falls Pointe 8.375% 63 01/12 8,973 6,225 6,450
Waterstone 8.000% 54 07/11 8,001 5,311 5,521
One Park 10 Plaza 8.350% 46 08/11 6,933 4,448 4,620
IBM Building 7.700% 45 03/11 6,784 4,465 4,653
Roswell North 8.375% 33 01/12 4,769 3,281 3,400
Woodbranch 8.250% 32 08/11 4,012 3,075 3,194
------- -------- -------
$163,609 $105,220 $62,828
======= ======== =======
</TABLE>
The aggregate annual maturities of notes payable at December
31, 1997 are as follows (in thousands):
1998 $ 4,381
1999 4,736
2000 5,120
2001 5,535
2002 5,984
Subsequently 79,464
--------
$105,220
========
NOTE E - Income Taxes
The tax effects of significant items comprising the
Company's net deferred tax asset are as follows (in thousands):
December 31
---------------------------
19971996 1995
------- ------- -------
Deferred tax assets:
Differences in book and
tax basis of assets... $2,404$ 675 $ 1,613
Operating loss
carryforwards......... 3,435 3,527 3,180
------- ------- -------
5,839 4,202 4,793
Valuation allowance..... (5,839) (4,202) (4,793)
------- --------------
Net deferred tax asset.. - $ - $ -
======= ======= =======
The Company's income differs for income tax and
financial reporting purposes principally because (1) the timing
of the deduction for the provision for possible losses or
writedowns, (2) the timing of the recognition of gains or losses
from the sale of investments, (3) real estate owned has a
different basis for tax and financial reporting purposes,
producing different gains upon disposition, and (4) mortgage
loans have a different basis for tax and financial reporting
purposes, producing different gains upon collection of these
receivables.
The net increase in the total valuation allowance for
the year ended December 31, 1997 was $1,637,000 and
relates primarily to differences in book and tax basis of real
estate. At December 31, 1997 and 1996, the net deferred tax
asset is entirely offset by a valuation allowance because
realization of the net deferred tax asset is not assured.
The following is a reconciliation between the amount
reported for income taxes and the amount computed by multiplying
income before income tax by the statutory federal tax rate (in
thousands):
Year Ended December 31
---------------------------
1997 1996 1995
------- ------- -------
Taxes at statutory rate.. $915 $ 4,921 $ 4,066
Operating loss carry
forwards............... (915) (4,876) (3,993)
Other.................... (45) (73)
Federal alternative
minimum tax............ - - 70
State income tax expense. - 103 12
------- ------- -------
Income tax expense....... - $ 103 $ 82
======= ======= =======
At December 31, 1997, the Company has net operating loss
("NOL") carryforwards for federal income tax purposes of
approximately $17,850,000 which expire at various dates through
2011. These carryforwards are limited to a maximum of
approximately $2,700,000 in any given year, subject to increases
for built-in gains recognized.
The Company has qualified under Sections 856 - 860 of the
Internal Revenue Code, as a Real Estate Investment Trust,
("REIT") effective January 1, 1997. In anticipation of
converting to a REIT, the Company reincorporated in Maryland
during 1996. If the Company distributes to its shareholders at
least 95% of its REIT taxable income, it generally will not be
subject to federal corporate income tax on that portion of its
ordinary income or capital gain that is timely distributed to its
shareholders. The Company will utilize the NOL carryforwards as
a REIT to the extent that it has taxable income prior to the
carryforward expiration dates, subject to the limitation as
described above. The Company intends to continue to qualify as a
REIT, although the Company will be subject to a number of
organizational and operational requirements. If the Company
fails to qualify as a REIT in any taxable year, the Company will
be subject to federal income tax on its taxable income at the
prevailing corporate rates and would be ineligible to requalify
as a REIT for four years.
In January 1998, the Company completed its reorganization
into an umbrella partnership REIT ("UPREIT") structure under
which substantially all of the Company's office building real
estate assets are owned by an operating partnership, Parkway
Properties LP (the "Operating Partnership"). The Company
anticipates that the UPREIT structure will enable it to pursue
new investment opportunities by having the ability to offer units
in the Operating Partnership to property owners in exchange for
office properties in transactions that may have preferable tax
characteristics. Presently, all interests in the Operating
Partnership are owned by the Company and a wholly-owned
subsidiary.
NOTE F - Stock Option Plans
The Company has elected to follow APB No. 25 and related
Interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value
accounting provided for under SFAS No. 123, Accounting for Stock-
Based Compensation, requires use of option valuation models that
were not developed for use in valuing employee stock options.
The 1994 Stock Option Plan provides for the issuance of an
aggregate of 225,000 Parkway shares ("Shares") to employees or
officers of the Company and its subsidiaries upon the exercise of
options and upon incentive grants pursuant to the Stock Option
Plan. On July 1 of each year, the number of Shares available for
grant shall automatically increase by one percent (1%) of the
Shares outstanding on such date, provided that the number of
Shares available for grant shall never exceed 12.5% of the Shares
outstanding. In accordance with these provisions, the shares
available for grant increased 100,002 and 41,689 in 1997 and
1996, respectively. Under the 1991 Directors Stock Option Plan,
as amended, options for up to 250,000 shares may be granted to
non-employee directors. Both plans have ten-year terms.
Pro forma information regarding net income and net income
per share is required by SFAS No. 123, and has been determined as
if the Company had accounted for its employee stock options under
the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995: risk-free interest of 6.0%;
dividend yield of 5%; volatility factor of the expected market
price of the Company's common stock of .427, .493, and .583,
respectively; and a weighted-average expected life of the options
of 3 years for the 1994 Stock Option Plan and 5 years for the
1991 Directors Stock Option Plan. Because the Company's employee
stock options have characteristics significantly different from
those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate,
in management's opinion, the existing model does not necessarily
provide a reliable single measure of the fair value of its
employee stock options. The weighted average fair value of
options granted during 1997, 1996 and 1995 was $6.80, $4.52 and
$4.39, respectively.
For purposes of pro forma disclosures, the estimated fair
value of the options granted in 1997, 1996 and 1995 is amortized
to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except per share
information):
Year Ended December 31
-----------------------------
1997 1996 1995
-------- -------- --------
Pro forma net income $ 14,152 $ 14,087 $ 11,578
Pro forma net income per share:
Basic........................ $ 2.00 $ 3.85 $ 4.15
Diluted...................... $ 1.96 $ 3.73 $ 4.07
A summary of the Company's stock option activity and related
information is as follows:
1991 Directors
1994 Stock Option Stock
Plan Option Plan
----------------- -----------------
Weighted Weighted
Average Average
Shares Price Shares Price
----------------- -----------------
Outstanding at
January 1, 1995 205,875 $ 9.92 85,500 $ 6.36
Granted 55,010 13.29 27,750 10.21
Exercised (11,613) 9.19 (21,000) 5.81
Forfeited (6,000) 9.19 - -
-------- ------- ------- -------
Outstanding at
December 31, 1995 243,272 10.73 92,250 7.64
Granted 44,291 18.80 13,500 16.00
Exercised (105,563) 10.00 (27,750) 8.12
Forfeited (6,562) 13.14 - -
-------- ------- ------- -------
Outstanding at
December 31, 1996 175,438 13.12 78,000 8.92
-------- ------- ------- -------
Granted 65,450 26.63 25,500 25.88
Exercised (29,990) 10.69 (15,750) 9.42
Forfeited (1,850) 22.22 - -
-------- ------- ------- -------
Outstanding at
December 31, 1997 209,048 $ 17.62 87,750 $ 13.76
======== ======= ======= =======
Following is a summary of the status of options outstanding
at December 31, 1997:
Outstanding Options Exercisable Options
---------------------------- -------------------
Weighted-
Average Weighted Weighted-
Remaining Average Average
Exercise Price Contract- Exercise Exercise
Range Number ual Life Price Number Price
- ----------------- ------- --------- --------- ------- -----------
1994 Stock Option Plan
$ 9.19-$12.22 67,873 6.7 years $ 10.51 67,873 $ 10.51
$12.67-$15.75 36,508 7.9 years $ 13.33 36,508 $ 13.33
$21.00-$25.63 40,317 8.5 years $ 19.10 19,293 $ 19.25
$26.63 64,350 9.4 years $ 26.63 - -
1991 Directors Stock Option Plan
$ 4.00 15,000 3.7 years $ 4.00 15,000 $ 4.00
$8.00-$10.17 37,500 7.0 years $ 9.23 37,500 $ 9.23
$ 16.00 11,250 8.5 years $ 16.00 11,250 $ 16.00
$ 25.88 24,000 9.4 years $ 25.88 24,000 $ 25.88
NOTE G - Other Matters
The Company issued 576,000 shares of its Class A Preferred
Stock, $.001 par value per share ("Preferred Stock"), and in turn
exchanged 576,000 shares of its Common Stock for the Preferred
Stock outstanding during 1996. The Company paid a dividend of
$138,000, or $.24 per share, on the Preferred Stock in the third
quarter of 1996. The net proceeds from the sale of the Preferred
Stock and the dividend paid are included in the shares issued-
stock offerings and cash dividends, respectively, in the
accompanying consolidated statements of stockholders' equity.
Supplemental Profit and Loss Information
Included in operating expenses are taxes, principally
property taxes, of $4,505,000, $2,169,000 and $1,301,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Supplemental Cash Flow Information
Year Ended December 31
-------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
Assumption of mortgage notes
payable in connection with
purchase of properties...........$ 14,868 $ - $ -
Loans to facilitate
sales of real estate and
real estate securities........... 900 350 410
Loan foreclosures
added to real estate
held for sale.................... - 80 443
Interest paid...................... 5,747 3,468 2,341
Income taxes paid.................. - 22 77
Litigation
The Company is not presently engaged in any litigation
other than ordinary routine litigation incidental to its
business. Management believes such litigation will not
materially affect the financial position, operations or liquidity
of the Company.
Accounts Payable and Other Liabilities
December 31
-----------------
1997 1996
------ ------
(In thousands)
Accrued expenses,
other than property taxes.... 5,155 $2,068
Accrued property taxes......... 3,311 1,999
Accounts payable............... 413 1,402
Security deposits.............. 2,185 636
Deferred gains................. 1,094 194
------- ------
$12,158 $6,299
======= ======
Interest, Rents Receivable and Other Assets
December 31
------------------
1997 1996
------- ------
(In thousands)
Cash receivables.................... $ 6,512 $2,255
Escrow deposits of taxes............ 1,486 959
Unamortized loan costs.............. 1,184 891
Unamortized lease costs............. 2,180 530
Prepaid items....................... 207 874
Straight line rent receivable....... 571 219
Security deposits................... 92 63
------- ------
$12,232 $5,791
======= ======
NOTE H - Subsequent Events
Subsequent to December 31, 1997, the Company purchased the
Schlumberger Building (previously known as the Veritas Building)
for $12,200,000. The Schlumberger Building is a 155,000 square
foot building with 450 surface parking spaces. This purchase was
funded with advances under existing lines of credit.
On February 25, 1998, the Company purchased a 13-building
portfolio totaling 1,470,000 net rentable square feet that
included properties located in five of its primary markets and
three new markets. The breakdown of the 13 building office
portfolio by market is listed below:
Number of Net Rentable Percentage of
Location Properties Square Feet Portfolio
------------------ ---------- ------------ -------------
Houston, TX 2 536,000 36.4%
Dallas, TX 2 251,000 17.0%
Ft. Lauderdale, FL 2 215,000 14.6%
Richmond, VA 3 179,000 12.2%
Knoxville, TN 1 89,000 6.2%
Chesapeake, VA 1 82,000 5.6%
Northern VA 1 72,000 4.9%
Greenville, SC 1 46,000 3.1%
-- --------- ------
Total 13 1,470,000 100.0%
== ========= ======
The purchase price of this portfolio totaled $163,014,000
and was funded by advances on existing lines of credit, a
$75,000,000 unsecured loan from NationsBank, NA and the proceeds
of two stock offerings discussed in greater detail below. The
NationsBank, NA facility requires the negative pledge of the 13
office properties purchased February 25, 1998, matures August 25,
1998, and has an interest rate of 7.025% until April 24, 1998.
Thereafter the loan will have an interest rate of LIBOR plus
1.40%. In connection with the portfolio purchase, the Company
increased its acquisition line from $55,000,000 to $85,000,000
effective February 25, 1998 and reduced the interest rate on both
lines of credit from LIBOR plus 1.75% to LIBOR plus 1.40%. The
lines of credit call for monthly interest payments, annual
commitment fees of .35% and quarterly unused fees of .175%.
The Company has committed a $97,000,000 fixed rate loan at
6.945% that amortizes over a 15-year term and matures ten years
from the date the loan closes. This loan will be secured by the
13 properties acquired in the February 25, 1998 portfolio
purchase and will be partially used to repay the NationsBank, NA
loan of $75,000,000. The loan will also contain a conversion
feature that will give the Company an option to unsecure all or
part of the loan upon receipt of an investment grade rating from
two of the major rating agencies during the first 24 months of
the loan.
The pro form effect on the Company's results of operations
of the portfolio purchase as if the purchase had occurred on
January 1, 1997 is as follows (in thousands):
Revenues $20,543
Net income $7,767
Basic EPS $1.10
Diluted EPS $1.08
Pro-forma results do not proport to be indicative of actual
results had the purchases been made at January 1, 1997 or the
results that may occur in the future.
Subsequent to year-end, the Company has completed two stock
transactions. On February 23, 1998, the Company completed the
sale of 451,528 shares of common stock to a unit investment trust
under its existing shelf registration with net proceeds to the
Company of $14,231,000. On March 11, 1998, the Company completed
the sale of common stock through the direct placement of 855,900
shares of common stock in a public offering with net proceeds to
the Company of $26,948,000.
NOTE I - Fair Values of Financial Instruments
Cash and cash equivalents
The carrying amounts for cash and cash equivalents
approximated fair value at December 31, 1997 and 1996.
Mortgage loans
The fair values for mortgage loans are estimated based on
net realizable value and discounted cash flow analyses, using
interest rates currently being offered on loans with similar
terms to borrowers of similar credit quality. The aggregate fair
value of the mortgage loans at December 31, 1997 was $1,290,000
as compared to its carrying amount of $1,117,000. The aggregate
fair value of the mortgage loans at December 31, 1996, was
$622,000 as compared to its carrying amount of $350,000.
The fair value of the mortgage notes payable without
recourse are estimated using discounted cash flow analysis, based
on the Company's current incremental borrowing rates for similar
types of borrowing arrangements. The aggregate fair value of the
mortgage notes payable without recourse at December 31, 1997 was
$108,971,000 as compared to its carrying amount of $105,220,000.
The aggregate fair value of the mortgage notes payable without
recourse at December 31, 1996 was $63,496,000 as compared to its
carrying amount of $62,828,000.
NOTE J - Selected Quarterly Financial Data (Unaudited):
Summarized quarterly financial data for the years ended
December 31, 1997 and 1996 are as follows (in thousands, except
per share data):
1997
---------------------------------------
First Second Third Fourth
------------------- --------- ---------
Revenues
(other than gains)........ $ 8,906 $10,404 $12,424 $16,353
Expenses.................. (6,868) (7,796) (9,736) (12,103)
Gain (loss)on real estate
and mortgage loans...... 1,506 68 (483) 1,816
------- ------- ------- -------
Net income................ $ 3,544 $ 2,676 $ 2,205 $ 6,066
======= ======= ======= =======
Basic per share data:
Net income.............. $ .62 $ .43 $ .34 $ .62
Weighted average shares
outstanding........... 5,718 6,288 6,532 9,736
Diluted per share data:
Net income.............. $ .61 $ .42 $ .33 $ .61
Weighted average shares
outstanding........... 5,848 6,405 6,675 9,891
Dividends paid............ $ .25 $ .25 $ .35 $ .35
1996
---------------------------------------
First Second Third Fourth
------------------- --------- ---------
Revenues
(other than gains)........ $ 4,534 $ 5,507 $ 6,291 $ 7,747
Expenses.................. (3,750) (4,663) (5,265) (6,488)
Gain on real estate and
mortgage loans.......... 193 5,507 163 4,046
Gain (loss) on sale of
securities.............. (190) 62 432 245
------- ------- ------- -------
Net income................ $ 787 $ 6,413 $ 1,621 $ 5,550
======= ======= ======= =======
Basic per share data(1):
Net income.............. $ .26 $ 2.00 $ .39 $ 1.31
Weighted average shares
outstanding........... 3,012 3,213 4,193 4,222
Diluted per share data(1):
Net income.............. $ .25 $ 1.93 $ .38 $ 1.27
Weighted average shares
outstanding........... 3,102 3,324 4,310 4,361
Dividends paid............ $ .113 $ .12 $ .14 $ .25
(1) As adjusted for stock split.
<TABLE>
<CAPTION>
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS)
Initial Cost to the
Company
Building and Capitalized
Description Encumbrances Land Improvements Costs
<S> <C> <C> <C> <C>
Real Estate Properties:
Office Buildings:
One Jackson Place - MS $17,501 $1,799 $19,730 $4,499
MTEL Centre'- MS 9,796 1,360 12,430 399
IBM Building - MS 4,465 1,169 5,337 637
Waterstone - GA 5,311 859 7,207 324
Falls Pointe - GA 6,225 1,431 7,659 159
Roswell North - GA 3,281 594 4,072 255
Meridian - GA - 994 9,547 79
Lakewood - GA 6,809 617 10,923 3
Hightower - GA - 530 6,200 1
One Park Ten - TX 4,448 606 6,149 504
400 Northbelt - TX 6,386 419 9,655 936
Woodbranch - TX 3,075 303 3,805 87
Tensor - TX - 273 2,567 86
West Office - TX - 52 378 39
Ashford II - TX - 163 2,076 75
Courtyard @ Arapaho - TX - 1,450 13,736 146
Sugar Grove - TX - 364 7,385 498
Fairway Plaza - TX - 2,268 4,467 8
Raytheon - TX 7,923 856 15,171 3
BB&T - NC 15,000 1,018 23,540 47
Charlotte Park - NC - 1,400 12,911 132
NationsBank - TN - 316 20,350 -
Forum II & III - TN - 2,634 13,886 328
First Tennessee Plaza - TN 15,000 457 29,490 302
Morgan Keegan Tower - TN - - 36,549 -
Vestavia - AL - 729 3,956 80
First Little Rock - AR - 966 9,300 -
Cherokee - VA - 158 3,366 51
Courthouse - VA - 553 7,059 227
Greenbrier - VA - 1,157 14,843 38
Corporate Square West - IN - 741 1,727 424
105,220 26,236 325,471 10,367
Land Held For
Development:
Charlotte Park - NC - 1,721 - -
Total Real Estate Owned $105,220 27,957 325,471 10,367
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
Gross Amount at Which
Carried at Close of Period
Building and Accumulated Year Year
Description Land Improvements Total(1) Depreciation Acquired Constructed
<S> <C> <C> <C> <C> <C> <C>
Real Estate Properties:
Office Buildings:
One Jackson Place - MS 1,799 24,229 26,028 (7,156) 1986 1986
MTEL Centre'- MS 1,360 12,829 14,189 (795) 1995 (2)1987
IBM Building - MS 1,169 5,974 7,143 (359) 1995 1986
Waterstone - GA 859 7,531 8,390 (389) 1995 1987
Falls Pointe - GA 1,431 7,818 9,249 (276) 1996 1990
Roswell North - GA 594 4,327 4,921 (152) 1996 1986
Meridian - GA 994 9,626 10,620 (180) 1997 1985
Lakewood - GA 617 10,926 11,543 (137) 1997 1986
Hightower - GA 530 6,201 6,731 (39) 1997 1983
One Park Ten - TX 606 6,653 7,259 (326) 1996 1982
400 Northbelt - TX 419 10,591 11,010 (476) 1996 1982
Woodbranch - TX 303 3,892 4,195 (183) 1996 1982
Tensor - TX 273 2,653 2,926 (82) 1996 1983
West Office - TX 52 417 469 (50) 1994 1986
Ashford II - TX 163 2,151 2,314 (48) 1997 1977
Courtyard @ Arapaho - TX 1,450 13,882 15,332 (286) 1997 1986
Sugar Grove - TX 364 7,883 8,247 (127) 1997 1982
Fairway Plaza - TX 2,268 4,475 6,743 (47) 1997 1980
Raytheon - TX 856 15,174 16,030 (32) 1997 1983
BB&T - NC 1,018 23,587 24,605 (736) 1996 1988
Charlotte Park - NC 1,400 13,043 14,443 (254) 1997 1982/84/86
NationsBank - TN 316 20,350 20,666 (212) 1997 1973
Forum II & III - TN 2,634 14,214 16,848 (359) 1997 1985
First Tennessee Plaza - TN 457 29,792 30,249 (185) 1997 1978
Morgan Keegan Tower - TN - 36,549 36,549 (229) 1997 1985
Vestavia - AL 729 4,036 4,765 (72) 1997 1988
First Little Rock - AR 966 9,300 10,266 (39) 1997 1986
Cherokee - VA 158 3,417 3,575 (136) 1996 1985
Courthouse - VA 553 7,286 7,839 (283) 1996 1984
Greenbrier - VA 1,157 14,881 16,038 (31) 1997 1985/87
Corporate Square West - IN 741 2,151 2,892 (467) 1990 1968
26,236 335,838 362,074 (14,143)
Land Held For
Development:
Charlotte Park - NC 1,721 - 1,721 - 1997 N/A
Total Real Estate Owned 27,957 335,838 363,795 (14,143)
</TABLE>
(1) The aggregate cost for Federal Income Tax purposes was approximately
$38,473,000.
(2) For Mtel Centre', this is the date of a major renovation.
NOTE TO SCHEDULE III
(in thousands)
As of December 31, 1997 and 1996
A summary of activity for real estate and accumulated
depreciation is as follows:
December 31
--------------------
1997 1996
Real Estate: -------- --------
Balance at beginning of year...... $132,309 $ 59,406
Additions:
Acquisitions and improvements.. 233,135 72,903
Cost of real estate sold.......... (1,649) -
-------- --------
Balance at close of year............. $363,795 $132,309
======== ========
Accumulated Depreciation:
Balance at beginning of year...... 9,507 7,122
Depreciation expense.............. 4,874 2,385
Real estate sold.................. (238) -
-------- --------
Balance at close of year.......... $ 14,143 $ 9,507
======== ========
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Registrant's definitive proxy statement which will
be filed with the Commission pursuant to Regulation 14A within
120 days of the end of Registrant's fiscal year is incorporated
herein by reference.
Item 11. Executive Compensation.
The Registrant's definitive proxy statement which will
be filed with the Commission pursuant to Regulation 14A within
120 days of the end of Registrant's fiscal year is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
The Registrant's definitive proxy statement which will be
filed with the Commission pursuant to Regulation 14A within 120
days of the end of Registrant's fiscal year is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
The Registrant's definitive proxy statement which will be
filed with the Commission pursuant to Regulation 14A within 120
days of the end of Registrant's fiscal year is incorporated
herein by reference.
Forward-Looking Statements
In addition to historical information, certain sections of
this Annual Report contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, such as those
pertaining to the Company's capital resources, profitability and
portfolio performance and estimates of market rental rates.
Forward-looking statements involve numerous risks and
uncertainties. The following factors, among others discussed
herein, could cause actual results and future events to differ
materially from those set forth or contemplated in the forward-
looking statements: defaults or non-renewal of leases, increased
interest rates and operating costs, failure to obtain necessary
outside financing, difficulties in identifying properties to
acquire and in effecting acquisitions, failure to qualify as a
real estate investment trust under the Internal Revenue Code of
1986, as amended (the "Code"), environmental uncertainties, risks
related to natural disasters, financial market fluctuations,
changes in real estate and zoning laws and increases in real
property tax rates. The success of the Company also depends upon
the trends of the economy, including interest rates, income tax
laws, governmental regulation, legislation, population changes
and those risk factors discussed elsewhere in this Annual Report.
Readers are cautioned not to place undue reliance on forward-
looking statements, which reflect management's analysis only as
the date hereof. The Company assumes no obligation to update
forward-looking statements. See also the Company's reports to be
filed from time to time with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a)(1)Consolidated Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets-
as of December 31, 1997 and 1996
Consolidated Statements of Income--
for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows--
for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity-
for the years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2)Consolidated Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
Notes to Schedule III
(3)Form 10-K Exhibits required by Item 601 of Regulation S-K:
(i)Articles of Incorporation, as amended, of Parkway
(incorporated by reference to Exhibit B to The Parkway
Company's Proxy Material for its Annual Meeting of
Stockholders held on July 18, 1996).
(ii)Bylaws of Parkway (incorporated by reference to Exhibit
C to The Parkway Company's Proxy Material for its
Annual Meeting of Stockholders held on July 18, 1996).
(ii)(a)Amendments to Bylaws (incorporated by reference).
(10)Material Contracts:
*(a)Registrant's 1994 Stock Option Plan (incorporated by
reference to Registrant's Proxy Statement dated
November 8, 1994).
*(b)Registrant's 1991 Directors Stock Option Plan, as
amended (incorporated by reference to the Registrant's
proxy statement dated November 8, 1994).
*(c)Form of Change-in-Control Agreement that Registrant has
entered into with Leland R. Speed, Steven G. Rogers and
Sarah P. Clark (incorporated by reference to the
Registrant's Form 10-KSB for the year ended December
31, 1996).
*(d)Form of Change-in-Control Agreement that the Registrant
has entered into with David R. Fowler, G. Mitchell
Mattingly and James M. Ingram (incorporated by the
Registrant's Form 10-KSB for the year ended December
31, 1996).
*(e)The Registrant's 1997 Non-Employee Directors Stock
Ownership Plan (Incorported by references to Appendix
B in the Registrant's Proxy Material for its June 6,
1997 Annual Meeting).
(f)Sale Agreement and Amendments between Brookdale
Investors, L.P., a Delaware limited partnership, and
Parkway Properties LP, a Delaware limited partnership.
(21)Subsidiaries of the Registrant, filed herewith.
(23)Consent of Ernst & Young LLP, filed herewith.
(27)Financial Data Schedule
(27.1)Restated Financial Data Schedules - 1997
(27.2)Restated Financial Data Schedules - 1996
(27.3)Restated Financial Data Schedule - 12/31/95
(28)Agreement of Registrant to furnish the Commission with
copies of instruments defining the rights of holders of
long-term debt (incorporated by reference to Exhibit 28E
of the Registrant's Form S-4 (No. 33-2960) filed with the
Commission on February 3, 1986).
(99)The Company Shareholder Rights Plan dated September 7,
1995 (incorporated by reference to the Registrant's Form
8-A filed September 8, 1995).
(b)Reports on Form 8-K.
(1)8-K - Filed October 2, 1997 - Reporting the purchase of
Morgan Keegan Tower and Hightower Centre.
(2)8-K - Filed December 2, 1997 - Reporting the purchase of
the Raytheon Building.
(3)8-K - Filed December 10, 1997 - Reporting the purchase of
Greenbrier Towers.
(4)8-K/A - Filed December 16, 1997 - Reporting the Purchase
and Sale Agreement for Greenbrier Towers.
*Includes management compensatory plan or arrangemnet.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PARKWAY PROPERTIES, INC.
Registrant
/s/ Steven G. Rogers
Steven G. Rogers
President and
Chief Executive Officer
March 27, 1998
/s/ Sarah P. Clark
Sarah P. Clark
Chief Financial Officer
March 27, 1998
/s/ Regina P. Shows
Regina P. Shows
Controller
March 27, 1998
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
/s/ Daniel C. Arnold /s/ C. Herbert Magruder
Daniel C. Arnold, Director C. Herbert Magruder, M.D.
March 27, 1998 Director
March 27, 1998
/s/ George R. Farish /s/ W. Lincoln Mossop, Jr.
George R. Farish, Director W. Lincoln Mossop, Jr.
March 27, 1998 Director
March 27, 1998
/s/ Roger P. Friou /s/ Steven G. Rogers
Roger P. Friou, Director Steven G. Rogers
March 27, 1998 Chief Executive Officer,
President and Director
March 27, 1998
/s/ J. Michael Lipsey /s/ Leland R. Speed
J. Michael Lipsey Leland R. Speed,
Director Chairman of the Board
March 27, 1998 And Director
March 27, 1998
/s/ Joe F. Lynch
Joe F. Lynch, Director
March 27, 1998
Exhibit (21) List of Subsidiaries
Name State
Corporations:
------------
Parkway Properties General Partners, Inc. Delaware
Parkway Realty Services, Inc. Mississippi
Golf Properties, Inc. North Carolina
Partnerships:
------------
Parkway Properties LP Delaware
Parkway Realty Services LLC Delaware
Parkway Mississippi LLC Mississippi
Parkway Jackson LLC Mississippi
Parkway Properties Tax Administration LLC Mississippi
Parkway Lamar LLC Mississippi
Parkway Portfolio I LLC Mississippi
Exhibit 23
Consent of Independent Auditors
Stockholders and Board of Directors
Parkway Properties, Inc.
We consent to the incorporation by reference in the
Registration Statement (Form S-8, on Form S-3, No. 333-00311)
pertaining to The Parkway Company 1994 Stock Option Plan, The
Parkway Company 1991 Incentive Plan, and The Parkway Company 1991
Directors Stock Option Plan and the Registration Statement (Form
S-3, No. 333-48161) and related Prospectus dated March 18, 1998
of Parkway Properties, Inc., of our report dated February 9,
1998, except for Note H, as to which the date is February 25,
1998, with respect to the consolidated financial statements of
Parkway Properties, Inc. included in this Annual Report (Form 10-
K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
-----------------------
Ernst & Young LLP
Jackson, Mississippi
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 959
<SECURITIES> 0
<RECEIVABLES> 12,232
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 14,143
<TOTAL-ASSETS> 368,592
<CURRENT-LIABILITIES> 123,851
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 244,741
<TOTAL-LIABILITY-AND-EQUITY> 368,592
<SALES> 0
<TOTAL-REVENUES> 48,087
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 29,925
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,578
<INCOME-PRETAX> 14,491
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,491
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,491
<EPS-PRIMARY> 2.05
<EPS-DILUTED> 2.01
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
RESTATED
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 4,686 480 486
<SECURITIES> 0 0 0
<RECEIVABLES> 5,182 6,343 7,365
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 0 0 0
<DEPRECIATION> 10,441 10,749 12,073
<TOTAL-ASSETS> 200,003 209,874 314,500
<CURRENT-LIABILITIES> 68,812 77,525 86,852
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 6 6 9
<OTHER-SE> 131,185 132,343 227,639
<TOTAL-LIABILITY-AND-EQUITY> 200,03 209,874 314,500
<SALES> 0 0 0
<TOTAL-REVENUES> 8,906 19,310 31,734
<CGS> 0 0 0
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 5,536 11,915 19,693
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1,332 2,749 4,707
<INCOME-PRETAX> 3,544 6,220 8,425
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 3,544 6,220 8,425
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,544 6,220 8,425
<EPS-PRIMARY> .62 1.04 1.36
<EPS-DILUTED> .61 1.02 1.33
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<LEDGEND>
RESTATED
</LEDGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 4,245 24,765 134 8,053
<SECURITIES> 1,993 1,796 507 0
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0 0 0 0
0 0 1 0
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0
0
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